Finance Committee on Sept. 20th, 2017

[The Chair, Liberal, Wayne Easter]

Mr. Albas, you have seven minutes.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

I appreciate everyone being here today.

I'm going to start with the Canadian Chamber of Commerce. Simply put, you've said your number once concern is the tax changes proposed by the government in relation to Canadian-controlled private corporations. You've mainly talked about the challenge. What I've seen from speaking to many of your members is that many of them do not know what to do and have stopped all investment. They've stopped hiring because they're concerned because they don't know the rules. I also know many of them are angry. They're angered by the fact that they're told that they're somehow tax cheats, that they're exploiting loopholes, rather than utilizing a system that's been set up so that it encourages people to keep investment and savings within their corporation. Now we've had a system of integration, where taxpayers can defer certain taxes if they hold it within the corporation, but eventually they will pay the same rate, if not more. Have you been hearing from your members the same kind of things?

[Hendrik Brakel]

Yes, I think our members have expressed themselves very forcefully on that. They object to the language that speaks of loopholes. Passive income is not a loophole; it's the way corporate tax has worked since 1973. Income splitting is paying family members. We get emails that are very passionate, saying, “My business wouldn't have succeeded if I didn't have my son working 12 hours a day”. And what is involved in reasonableness tests? How do you assess the value of a worker? We've had very, very aggressive emails and calls for—

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

You have cases where CRA may be overwhelmed with something that will eventually be thrown onto Tax Court. I think this is the complexity of them. I have many chartered accountants who are quite confused as to how the government will do it, but I guess they will do what they do.

I don't want to talk about just loopholes. I totally agree it's a feature of the system, not a loophole, when we talk about passive versus active investment. If I choose, as a corporation owner, to put money into a bond, or if there is a new IPO or issuance of stock for a company, if I don't have plans for that money, I will put it in the hands of someone so that they can produce and create in the economy. Is that correct?

[Hendrik Brakel]

You're exactly right. A lot of business owners invest in inside businesses and in businesses that their employees may start. It seems like a dividend or portfolio income, but it really is the type of venture capital and the type of productive investment that we absolutely want to see and encourage in Canada. That's how small businesses get their start.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Well, again, many people will hold assets passively, just in case there is catastrophic failure in equipment, plans, or whatnot. If they are lucky enough to sell their company, many times they just end up selling the assets. What remains is often what their retirement is.

Of course, you mentioned income splitting. We allow income splitting for seniors with pension income. I just want to point out that is not available to entrepreneurs when they retire. That's something that these changes will make less fair. Many entrepreneurs do not have a pension. People might say they could invest in CPP, but then they would be paying twice. Again, they wouldn't be able to put that money into a vehicle where they could quickly draw upon it if there was a catastrophic failure of a mill or a certain piece of equipment.

I certainly appreciate your contribution.

I'd like to go to the Canadian Vintners Association. Obviously, estate planning is very important for estate wineries. You've said that you are quite concerned about how these rules would impact small family wineries. Is that correct?

[Dan Paszkowski]

Yes.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Along with some of the changes this government has already put in place by adding excise to wine.... You have the big wineries that do pay excise, and they are complaining that consumers are going to actually consume less because of a higher price. You also have smaller wineries that do not have the same scalability, that have those extra costs to be able to market their product. They are also going to be disincentivized because of property values and these changes. This does not paint a very good picture for your industry if these changes go ahead.

[Dan Paszkowski]

That's absolutely correct. As I mentioned, the excise impact alone is $87 million to the economy, and our analysis shows that it's going to raise an extra $500,000 per year for the federal government. You put excise on top of carbon tax on top of the challenges that we will have competing—not that we're opposed to free trade—with monsters like the United States and European countries. Then the small business tax proposals on our small and medium-sized enterprises is definitely going to have an impact. It creates a lot of uncertainty in the industry and in the ability to invest at a time when we have to be investing to be able to compete with the rest of the world.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Mr. Harford, you have also mentioned that with higher prices there will be less consumption. We've already seen some of the trends in your industry, at least in Canada. Canadian consumption seems to be down. Again, raising prices means less consumption. That means you are worried. Is that correct?

[Luke Harford]

That's correct. The affordability of beer is becoming an issue for the industry. It has been an emerging issue for some time. Certainly, the automatic nature of the escalator that was brought in under budget 2017 is just going to make the problem worse because it's going to increase the excise rate, which is a production tax. Then on top of that there are provincial markups, and HST on top of those. By the time the product hits the consumer, we're talking about a much bigger increase that is not going to help sales.

[The Chair, Liberal, Wayne Easter]

We'll cut it there. I'm sure this won't be the first time I remind panels and committee members, but the small business tax proposal is going through consultations that end on October 2. I would remind people to get their input into the Department of Finance as well.

I think it's been a good discussion, though. I'm not criticizing the discussion in any way.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Yes, okay.

[The Chair, Liberal, Wayne Easter]

It could impact competitiveness and productivity, which we're looking at.

Mr. Dusseault.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you, Mr. Chair.

My thanks to all the witnesses for participating in this meeting.

My question is about airports, or more specifically, the price of airline tickets.

One of the briefs submitted—I think it was the one from the Canadian Airports Council—mentions that our airport infrastructures are considered among the best in the world, but that the cost of airline tickets is among the highest in the world.

Mr. McKenna and Mr. Gooch, can you suggest a solution to the problem? If we wanted to bring down the cost of airline tickets, do we have to look at the screening points that passengers have to go through or at the regulations? What do we have to do to reduce the cost of airline tickets, as well as the rent? You said that rents are high. Why do airline tickets cost so much?

[John McKenna]

Here is the problem. Our industry, which once belonged in large part to the government, was privatized, but the government continues to receive money. Our industry subsidizes the government to the tune of about $1 billion per year, while our neighbours to the south do not have to give their government any money. That includes passenger insurance fees, the excise tax I was talking about, and rent for the airports. Those three items come to more than $1 billion annually. That makes our industry less competitive, right off the bat.

The airports are not subsidized by governments in any way. Passengers pay for the entire infrastructure. The value of all the airports that were transferred in the mid-1990s has been assessed at $1.5 billion. Mr. Gooch will be able to tell you how many millions of dollars have been invested in the airports since then. It is likely billions of dollars, all paid for by passengers. That is why it is very expensive to fly in Canada.

[Daniel-Robert Gooch]

Thank you for the question.

The subject is quite complex. But the cost of air tickets really is a problem, especially for airports close to the border.

On that, on the revenue side, as I've said, we've put forward a couple of recommendations allowing airports to be a little more creative and inventive in terms of how they develop their businesses. The formula for rent is charged on gross revenue, which means that if there's a business line with fairly thin margins, they may have to pay as much as 12% in rent on any revenue they earn, while another organization across the street that's not an airport authority would not have to pay it. They have to weigh that.

Certainly, looking at the airport rent formula there would be very helpful. We've said to eliminate it for airports. At the very least, eliminate airport rents for airports with fewer than three million passengers. That would be all of them but the large eight. I think it would only affect about $20 million, but it would greatly benefit those airports.

For the larger airports, where we're seeing such strong growth, the bigger concern, honestly, is around investment and services. The money is coming out of the industry, and what we're saying is let's make sure that gets back into supporting the services travellers need. The cost of travel is a big priority for the government, but so is the traveller experience. We're having the right conversations on CATSA, for example. That's good, but it needs to come to fruition. CATSA needs to be adequately funded next year.

The CBSA is working very well with airports to mitigate the problems that we saw in Montreal in particular last year, but Toronto is still having some serious problems, and I have a report here. Over a two-week period in August, 73 aircraft were held at the gate with travellers kept on board because the customs hall was too full. It's the kind of tarmac delay that, in other areas, we're trying to mitigate.

Certainly, for the largest airports, it's less about reducing the costs and more about making sure the services are adequately funded so we can manage that growth.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you for providing us with possible solutions.

I very much support airports in their efforts in areas such as competitiveness and productivity.

Now I would like to talk about wine.

I was surprised to learn that Canadian wine accounts for only 33% of sales in Canada. Compared to other countries, that figure is very low. Wine consumption is increasing, and that is not the case for beer. The increase provides great possibilities for growth in the sector, and that is positive for you.

The Minister of International Trade said today that it is a great day for Canada because the comprehensive economic and trade agreement between Canada and the European Union has gone into effect.

Given the competition that will enter the Canadian market from the European wine industry, would you say that this is the greatest day of your lives?

[Dan Paszkowski]

I wouldn't say it's the best day for Canada, but we have been supportive of CETA since it started being negotiated in 2009, the fundamental reason being that it opens up access to millions of consumers for our products and it eliminates import tariffs immediately, significantly higher import tariffs than are available on European wines entering Canada.

The challenge we have is that we own, as you mentioned, only 32% of our domestic market. Of that, 10% is our premium wines. That 10% is what we're looking at for the export market, not the value wines we sell within the domestic market only. When we aren't able to sell our wines across interprovincial borders, that does not allow us to grow our domestic marketplace. When we own only 32% of our market, we have to grow our domestic market, as every other wine-producing country does, to then enter into the export market. We can't turn our back on a domestic market and only export.

To do that, we are looking at measures such as changes to the excise duties to ensure that we're competitive, elimination of interprovincial borders, and introduction of a wine industry innovation program to help us invest in measures that will allow us to become more competitive, grow market share in Canada, and take advantage of the opportunities that these trade agreements have put in place.

We've always said we support trade agreements, but as with other countries, our government has to help us take advantage of what those trade agreements have to offer. If not, Europe owns 50% of this market; they will enter into this market duty-free starting tomorrow and continue to capture more and more market share.

We're looking for support, as is provided to any other wine-producing country, to be able to grow our domestic marketplace and contribute more to the economy.

As I mentioned, what we're proposing in terms of WIIP, the wine industry innovation program, will cost very little for the federal government and contribute $7 billion over five years to the national economy.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Before I turn to Mr. Sorbara, I have a question for you.

We had that big discussion on inflationary excise taxes in the last pre-budget consultations. In your brief, I don't know the page number, but you basically leave the impression or you're saying that the excise duty indexation will, on average, raise an additional $8.45 million in annual excise revenues. It will increase consumer price, and so on, but it will mean an average annual loss to the economy of $87 million.

Are you suggesting that if the amount of money the federal government is getting out of increased excise taxes was lowered, the government would have more revenues? I don't follow your line of thought in this submission.

[Dan Paszkowski]

When the excise escalator was put into place in the budget, the question was asked to finance officials whether or not they had done any analysis on this introduction. The response was no, they had not.

We did engage an economist, based upon the economic model that we released in March of this year, to see what the impact was. Based upon price elasticities of consumers purchasing wine, if the excise increased by 2% every year and the industry passed that on to the consumer, given that the wines that are affected are value brands, the consumer is very price conscious, so they would move away. They would demand something else and the industry would lose out.

As we modelled that through our economic model and seeing what the impact would be on the total economy, the results that came out were that the increased excise on these Canadian-produced wines would result in additional revenue of roughly $8.5 million per year over the five-year period that we studied, that federal taxes would go down by about $7.9 million based upon a decrease in demand, and provincial taxes would go down by about $7 million. The end result would be a gain to the federal government, in terms of taxation, of roughly $500,000 per year on average over the five-year period.

However, the decrease in demand, the impact on the total economy as we are a $9-billion industry, as you work through to the liquor boards, to the restaurants, to the truck drivers, everything else, the direct, indirect and induced impact of the excise escalator over that five-year period would be a loss to the economy of $87 million.

[The Chair, Liberal, Wayne Easter]

Okay. That clarifies it for me. Thank you very much.

Is it possible for you to forward that study to the clerk, that economic analysis?

[Dan Paszkowski]

Absolutely.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Sorbara, five minutes.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you.

Welcome to you all and thank you for your presentations.

I'll take a step back in terms of my comments this afternoon.

The OECD just raised our growth forecast for this year. I think it's 3.2%, so we'll be leading the G7 for a second quarter, and I'm going to use the term “which rocked”—I'll go back to my teenage years—a 4.5% annualized growth rate. The Canadian economy has generated nearly 400,000 new jobs, the majority of which are full-time. Our unemployment rate has fallen to a historical low and our participation rate has actually ticked up.

There are some really goods signs going on within our economy and it's great to report that, but we can never rest on our laurels. We always must work harder and we must work harder with our stakeholders.

I would like to say to the Canadian Chamber of Commerce that your members' message is loud, it's clear and we are listening. There is a consultation period. Many constituents and stakeholders in my riding, and the area I live in is York region, are entrepreneurs. I was once an entrepreneur in the sense that I was awarded an entrepreneurial award by the Honourable Grace McCarthy, a social credit cabinet minister in the late 1980s or the 1990s, so I hear you.

At the same time, tax fairness is something that we need to look at and issues of income sprinkling, not splitting but income sprinkling, and conversion of dividends to capital gains need to be looked at. We also need to ensure that there are no unintended consequences on things like capital formation and that small businesses continue to thrive, much like they're thriving today. I'll leave it at that.

Amazon—that's the airport guys—has stated that they will put a second headquarters somewhere in North America, but they will need a proper and sufficient sized airport where they can move goods, services, and people. I can think of no better place than the Toronto area where myself and my colleague, Mr. Grewal, sit. What can we do to improve our airport services to ensure that we can attract investment such as the potential Amazon second site?

Thank you.